Financial Measures to Consider before Investing in a Stock

You're thinking of buying stock in a company, but before you invest your hard-earned money in hopes of a profitable return, check out some financial ratios that can help indicate whether the company is on sound financial footing. Here are key measures to consider:

Price-to-earnings ratio (P/E): For large cap stocks, the ratio should be under 20. For all stocks (including growth, small cap, and speculative issues), it shouldn't exceed 40.

Price-to-sales ratio (PSR): The PSR should be as close to 1 as possible.

Return on equity (ROE): ROE should be going up by at least 10 percent per year.

Earnings growth: Earnings should be at least 10 percent higher than the year before. This rate should be maintained over several years.